by Paul Hoffmeister, Portfolio Manager and Chief Economist
The theme that we’ve been emphasizing this year is that policy volatility is likely to lead to market volatility, and last month was a prime or even historic example. Of course, on April 2nd otherwise known as “Liberation Day”, President Trump announced a series of tariff measures, including universal 10% tariffs on all imports (except Canada and Mexico) and additional country-specific tariffs against 60 countries. The S&P 500 and Nasdaq Composite subsequently fell nearly -12% and -13%, respectively, between April 2 and April 9. The equity market panic evoked memories of Smoot Hawley and the 1929-1930 stock market selloff.
Then, on April 9 at 9:37am ET, President Trump posted on Truth Social, “THIS IS A GREAT TIME TO BUY!!! DJT”. This marked almost the exact bottom in stocks, and since then the major US equity indices have reversed much of their post-April 2nd declines. The S&P 500, for its part, posted its longest winning streak in 20 years. The shift in narrative from the White House during the last month is obvious, shifting from signaling that “tariffs are going up” to “trade deals are going to be worked out”.
The first meaningful trade deal announced so far has been between the United States and the UK. According to Bloomberg, the deal will fast track American goods through UK customs, reduce barriers on agricultural, chemical, energy and industrial exports, and increase market access for American beef, ethanol and other products. For the UK, the deal will enable UK manufacturers to annually export a hundred thousand automobiles to the United States at a 10% tariff instead of the 27.5% tariff that Trump recently threatened. According to President Trump, the deal will establish a baseline 10% tariff (from 3.4%), reduce UK tariffs from 5.1% to 1.8%, generate expected tariff revenues for the US of $6 billion, and boost certain US exports by $5 billion.
This deal may also create a framework for deals with other countries, with the US clearly looking to maintain a universal 10% tariff on imports with few exceptions and indeed create an external revenue source, as well as reduce foreign trade barriers (by reducing foreign tariffs and increasing market access). While during the first week of April it looked like the US was going to play hardball and trade negotiations were going to be prolonged and contentious, markets seem to be much more positive about the outlook for trade negotiations. Another positive development in recent weeks is the fact that there have not been significant retaliations from trading partners.
Notwithstanding, this is only the first major trade deal; and holding all other variables constant, additional deals will likely be needed to substantiate the market’s current optimism and propel equities to pre-Liberation Day levels. The big trade deal would of course be with China. On Thursday, President Trump said that he wouldn’t be surprised if such deal were reached. If that happened and US-China tensions eased, equity indices could test their 2025 highs.
Notably, President Trump said on Thursday May 8, “You better go buy stock now. Let me tell you. This country will be like a rocket ship that goes straight up.” Is the President making another bold market call like he did on April 9?
At the moment, the economy is “holding up” reasonably well. Even though real GDP contracted -0.3% in Q1 quarter-over-quarter, this was mainly caused by a jump in imports (seemingly due to front-running the Trump tariffs) and slightly less government spending. Meanwhile, the labor market continues to be resilient. Even more, S&P 500 earnings for Q1 have increased 12.8% compared to the first quarter of 2024, according to John Butters of FactSet. [1] This creates a good footing for the current equity environment.
Of course, along with trade negotiations vis a vis China and other countries, there are other major macro variables in play, especially related to taxes, geopolitics and the Fed, which will in large part determine whether the President’s recent comments turn out to be accurate. Congress is expected to finalize the Trump tax cut extensions by the July 4th recess; the geopolitical outlook is uncertain and requires clarity; and the Fed appears to be staying firm with current interest rate levels until the tariff outlook is clearer. Policy volatility remains, and so does the potential for more market volatility, both to the upside and downside.
[1] Source: Investors Business Daily, S&P 500: 5 Stocks Absolutely Crush Analysts' Profit Forecasts | Investor's Business Daily
Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).
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